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GST and De-stocking: Where's the proof?

A key argument offered as an impact
of GST on economic growth has been in terms of the de-stocking effect. The idea
here is that as the GST was to be implemented, producers and sellers of goods
decided to get rid of their excess stocks first, which were priced as per
earlier tax rates, in Q1 2017-18. Only once the GST was implemented was another
batch of fresh stock expected to enter the markets.

This sounds like a reasonable
enough argument, and reports indicated enough anecdotal evidence in favour of
it. A look of data on stocks, however, offers a distinctly different picture.

The RBI’s quarterly Order Books,
Inventory, Capacity Utilisation survey released in October this year, actually
shows a buildup in inventories during Q1, 207-18. The inventory to sales ratio
increased to 46.7% - a number higher than that during both the previous quarter
(42.4%) and the corresponding period of the previous year (45.3%). Both stocks
of finished goods and raw materials contributed to this rise.

Further, new orders increased in
year-on-year terms in both Q4, 2016-17 and Q1, 2017-18 by 15.7% and 11.3%
respectively. This suggests that demand for goods continued to be robust, both
in terms of a spillover from Q4, 2016-17 and Q1, 2017-18 as well. Average
backlog orders and average pending orders also continued to shrink on a year on
year basis, indicating that production continued at an even, if not
accelerated, clip.

These two data sets raise the
question: Was there a hit to production at all on account of GST?

It is possible that the data
considered in the survey is far too small to paint a bigger picture. Even
though the overall survey covers 805 manufacturing firms, comparable data for
inventories is available only for 372 companies and for order books for 156
companies. Given the large informal nature of the Indian economy, it is thus
likely that at least some part of the story was missed in the survey. At the
same time, it would be wrong to negate the critical relevance of the data that
we do have.

The upshot: While GST could have
had some de-stocking impact, the extent might have been overplayed. The
industrial sector has been in doldrums for a much longer time. Some softening
in consumption expenditure has likely added to the woes of Indian industry.
Added to this, if we consider a pickup in merchandise exports, it is likely
that some demand for domestic goods could be getting substituted for by foreign
goods, further reducing demand for industrial products.